Futureproof Renewable Sustainable Energy #1

PRASEG Annual Conference 2012
http://www.praseg.org.uk/save-the-date-praseg-annual-conference/
“After EMR: What future for renewable and sustainable energy?”
31st October 2012
One Birdcage Walk, Westminster
Twitter hashtag : #PRASEG12

Followed by Part 2 and Part 3.

PLEASE NOTE : The record is NOT verbatim and should not be treated as such. Check against delivery, I think they say in the trade. If I have scribbled incomprehensively or missed something, I have interpolated according to the spirit of the context. I am open to correction or challenge on my record of the event.

[Alan Whitehead MP : chair of PRASEG]

People are asking about the title of this conference “aren’t you being a bit previous ?” But we do need to talk about the future of renewable and sustainable energy when the Energy Bill comes in with the aim of delivering a low carbon economy. We are at a juncture also where we need investor certainty. There’s been the very successful Round 3 Offshore wind power licencing. The Electricity Market Reform (EMR) is going to be vital in terms of the atmosphere and landscape of that process taking place. Renewable energy is one of the largest areas of investment in the UK. We need to make sure that we meet our targets for the 2020s and onwards. The last thing we need is the shambles of yesterday and this morning – conflicting messages on wind power from two Ministers and a correction by a third Minister, and a further correction at Prime Minister’s Questions. The press treatment will undermine investment certainty in Government policy. With the EMR we *will* be able to talk about the time after the 2020s. Maybe there’s an opportunity that comes out of this political storm. We do need clarity. We need to go ahead and reach our targets and exceed them. Renewable energy will play a part we know it can in the “Energy Revolution”.

[Laura Sandys MP, PPS to Greg Barker MP, Secretary of State Climate Change, Department of Energy and Climate Change]

The work of the Energy and Climate Change Parliamentary Select Committee shows how important this subject is. It is not partisan. In many ways energy is a very big challenge. Addressing it is about putting this country’s interests first with a sustainable and reliable energy system. I am pleased that this event has the support of DONG Energy. My Constituency is host to the London Array [wind power project]. If all the MPs had the experience [of the integration of renewable energy projects with the local population] I had with DONG. They have built a strong community coherence and shown dedication. The project is very much part of the local environment. There has been no better experience than in Thanet. I must also put in a caveat, not speaking as a PPS, but as an expert in energy for 20 years. In many ways, the big challenge is not the 24 hours of [press] debate. I think the second biggest challenge, after deficit reduction, is keeping the lights on – building a long-term competitive energy system. We are in a difficult environment, trying to raise £200 billion of investment at a time of financial contraction. Wholesale energy prices are rising. The challenge is to create a low carbon resilient system. There are no easy energy technology options. We have to balance up price and price stability; supply and security of supply; and even the aesthetics. There is nothing that meets all our requirements entirely. Every energy option has some pain. We need to understand this and be big. We need energy renewal. This is a subject for big people. For people with big ideas and courage to deliver long-term strategy. We need a mixed energy economy – we should not have vilification of any technology – no “religious” response to any technology. We need to focus clearly on our legal obligations and targets. We must also reflect aspirations and realities. The 20th Century was a battle of ideas – capitalism versus communism; free market very long-term planning. This century will see a massive struggle for resources – to sustain the population in each country. I’m not sure it will be such a friendly one. Energy resources and renewable energy, even, will become more expensive. So maximising our supply from domestic renewable energy will provide us with more stability and security. Some say we’re going it alone on decarbonisation. Look at China’s planned investment of $473 billion and the EU and progressive States in the US. The smart, the bright and the intelligent are embracing it. Green and renewable energy are not some form of “sandal” economy, a tie-dye tee shirt. We’ve got to wake up to reality. We’ve got to also look at the challenge of renewing our energy system. It’s an opportunity to be aspirational. I don’t want a lowest common denominator energy system – I want something aspiration that looks to the future in behavioural, structural and technological terms. The EMR is the Government’s job – to get right the forward market and the right settlement market for your industry. The Government is there to support you. Companies are key to making big differences. We are constantly looking at the wrong end of the supply chain – as engineering blokes – looking at big energy projects. A modern, interactive, smart system will take a new approach to consumers. We need new technology, not just new generation technology, but throughout the supply chain. Democratisation – distributed, de-centralised energy – and opportunities for real demand reduction. If developing new energy systems, re-engineer it around the consumer. Take for example mobile phones – thousands of tariffs, but the customer still feels in control. We are as energy consumer merely receivers of energy bills. We cannot conceive of how to “consume” energy. The system is old-fashioned. A command-and-control environment. If the customer knew that there were 100 hours of energy “peak” demand – mostly on Tuesdays in February between 5 and 9pm, if I remember rightly, and that between 5 and 7% of all infrastructure and distribution arrangements are focused on those 100 hours, they’d say “Fabulous. Give me fifty quid and I’ll turn all the lights out.” We need to start to respond [to these exceptional cases] because “peak” is not talked about around the dining room table. We need to be transparent in communication – unnecessary capacity [energy provision in the supply system] is due to old-fashioned practices. At the heart of a new energy system we need a new vision for consumers. I’m a bit green – a “Turquoise Tory”. My father introduced the first clean air Act. Macmillan told him it would be the end of industry. In months, the UK was the leading exporter of clean coal technology. Modernity will move beyond current technologies. It is clearly important to have infrastructure that allows more technologies to come on board. Something we don’t talk about it grid. I have a real sense that it has purpose. The vision is that it should be a plug-and-play operation – like the X-box. Generators are the software – accessing the grid, either microgenerators, community generators, macro generation. The big breakthrough will be getting the grid to play a real part of the new energy system – like the body’s blood system. I’m leaving all the policy bits to the Minister. Because energy resources have been so freely available, so cheaply, in distribution, the Cinderella of all policies is demand reduction. We need to get a clear understanding of where we can *not* (where we do not have to) generate. We can choose to deliver a smart set of energy policies. The smarter the policies, the less generation we need to do. A creative part of these policies will be policies to address demand reduction. We need some other mechanisms – not least price transparency. Energy suppliers need to design their products so that consumers can reduce it. We are currently flying blind. The customer does not understand what they are using – where, when and how – the truth about how much energy costs. Smart consumers deliver smart markets.

[Start of first session “The Future of Renewable and Sustainable Energy”]

[Ben Sykes, Director, UK Markets, DONG Energy]

We have 720 MW of offshore wind energy. I’m going to approach this from a purely business angle. How is the landscape looking for a business doing a lot in offshore wind ? We hear a lot of talk about Renewable Energy. It’s time to differentiate within that. There are different sets of challenges – let’s be realistic. So, considering the impact of the EMR on offshore wind in future, DONG sees a lot of good things coming out of the EMR. The “Contracts for Difference” (CfD) we think is a good one. It gives investors certainty (although there are risks that include the counterparty risks…) DONG is active in bringing in investors – pension funds, private equity. These need to see the certainty of revenue. The big question : what the implementation model will say about the energy mix. How the Energy Bill deals with energy mix is critical. The capacity [mechanism] allocation – nothing to do with the Contracts for Difference – as deployment increases it will affect the balance in the Levy Control Framework. [Note : the Capacity Mechanism is proposed to pay large power plant to remain on standby in the case they are needed as backup generation. The Levy Control Framework is effectively a hard cap on HM Treasury spending in each area – the Government will only subsidise a certain amount of electricity generation capacity held in standby each year, for example.] This is a big issue : will we have the conditions for bringing these projects forward – which are years in the planning ? It’s very difficult spending tens of millions of pounds without knowing if we have access to the subsidy – if we end up walking blind for 5 yeas and then hearing “Oh sorry, there’s no capacity [mechanism funding] left for this year” from Whitehall.

[Nick Molho, World Wildlife Fund (WWF)]

I thought I would touch on the context of the EMR. The International Energy Agency (IEA) in their World Energy Outlook (WEO) says tht unless we shift our energy systems we will be using all the carbon we *can* use by the 2020s in order to keep within the 2 degree global warming target. Where the EMR sits : there is considerable investment uncertainty – the impact of uncertainty can be made clear by recognising that 2030 is only one investment cycle away. We need a framework in the very near future. Does the EMR do enough to attract large amounts of capital ? Yes, two reasons. If there is a long-term volume signal – a decarbonisation target for example – signals especially to renewable energy. And second, if there is a stable and well-balanced Feed-in-Tariff Contract-for-Difference (FiT CfD) for Renewable Energy. Our report from WWF showed that feed-in tariffs are key – continued policy support will be key. If we want to reduce the cost of finance, we need to avoid the summer offshore wind power support levels chaos. Around 40% of our power was generated by gas in 2011 – the UK has a lot of existing gas. A limited amount of new gas generation will be needed to balance the grid in 2030. The role of unabated gas [without Carbon Capture and Storage (CCS)] will have to be limited increasingly – it should not exceed 10% by 2030 if the UK fully de-carbonises according to the Committee on Climate Change (CCC) budgets. The CCC have pointed out that a large amount of gas [percentage terms] is economically not feasible. The International Energy Agency (IEA) and others still project increases in the gas price. Energy Efficiency is often underestimated. The McKinsey report for DECC said that energy efficiency could reduce consumption by 40%
[ http://www.eaem.co.uk/news/uk-could-cut-electricity-demand-40-says-mckinsey “Capturing the full electricity efficiency potential of the UK” ] by 2030. We have to put energy efficiency at the core of policy – according to a WWF and Green Alliance report [ http://www.wwf.org.uk/what_we_do/press_centre/?unewsid=6259 “Creating a market for electricity savings: Paying for energy efficiency through the Energy Bill by Rachel Cary and Dustin Benton” ]. We need energy efficiency enabling powers in the Energy Bill. This is critical to the ability to provide long-term investment, to be clear on gas and energy efficiency, and working across borders on EU co-operation.

[Simon Skillings, Senior Associate, E3G]

What a fascinating industry this is. The EMR is a delivery mechanism. If we ask what it is here to deliver – the “Pool” – how much commodity – the National Grid has got to deliver it regardless of conditions. The question should be how effective they are at delivering what they’ve got to deliver. The trouble is, the future is uncertain, and it’s difficult to be prescriptive about what we need. The challenge is to risk manage economy/energy/environment – what can the Energy Bill do ? Should it ignore the risk management and leave it all up the National Grid ? Alternatively it can specify with a little more clarity – effectively saying to National Grid “go away and do your work” is not viable. The Energy Bill therefore has to specify what the National Grid has to deliver with the EMR tools. How the trade-offs are made should be outed in a more public arena. The fear is that the Treasury holds money as a weapon, it’s not democratic – balancing against other requirements. The EMR has to contain something about carbon control, something about capacity and the levy, something about security of supply. Is it enough ? No – there are actually two other areas. Everybody wants to talk about “demand side” [Demand Side Management (DSR) and Energy Demand Reduction (EDR)]. It’s obvious but hard. Can we mandate demand side in the Energy Bill ? It needs to have some sort of evidence in the Energy Bill about the role of renewable energy into the long-term. Maybe the existing 2020 targets give enough clarity. Could we leave the broad discussions another year or two before we can be clearer on targets in the EU ? No, clearly in the short number of years to 2020, targets for further out need to be provided for renewable energy. Success will be judged by how the Energy Bill specifies how National Grid delivers.

[James Murray, Editor, BusinessGreen, chair of meeting]

Interesting comments there – about the Treasury being anti-democratic – ducking questions of responsibility.

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

I run the RBS Energy Team, and the Steering Committee of the Low Carbon Finance Group – I’ve been living and breathing this for some time. My perspective is from the lender angle. I echo what Ben says. Clearly we have a situation where there is significant weakness in the economy. There is a massive reduction in the amount of capital. Creit ratings are under pressure. Bank liquidity is tight. But banks really like this sector. Generally this sector performs well. We have financed 9 gigawatts of renewable power. We want to lend money to this sector. Lending volumes are a lot lower the last ten yeas. There has been a hiatus caused by the EMR consultation process. Developers are cautious, and it has not been helped by the revision of the Renewables Obligation (RO) banding. Lenders and developers need a regulatory framework or face regulatory risk. We have financed renewable energy and “conventional thermal”. What matters in policy is transparency, predictability and durability. Can you explain the new system to a sceptical foreign investment committee to encourage them to commit equity capital ? Energy investors have choices…We need to deliver clear overall messages. With the complexity of the EMR there will be issues. The public “debate” – a worrying trend is that there is perceived politicisation of the sector. There needs to be a political debate about policy [not a media debate]. It is unfortunate what has happened in the press. Those things make serious investors very, very nervous. They wait until the path is more clear – then they know what they’re going to be getting. With Contracts for Difference (CfD) it’s about the mechanism – the counterparty and the process. There’s a long lead time and the potential for rationing of CfD’s is likely to put investors off. Also, the involvement of the Government in setting the CfD – whether that’s on volume or price. This is more interventionist than generation has been in the past – investors need to make sure they are comfortable. They are watching the Capacity Mechanism with huge interest – in relation to “conventional thermal” and what it implies for generation mix. On liquidity – independents [independent generators] need a route to sell their power. Even under the Renewables Obligation (RO) we are seeing much less volume of Power Purchase Agreements (PPAs) being agree, and with less favourable terms. Gas is potentially a gamechanger, and it will be playing a major role in this sector. Sticking to the 2020 target has reassured people, we can point to something written in tablets of stone – it offers a direction. I personally think that 2030 indicators would be extraordinarily helpful – as undertaking a commitment to pieces of the low carbon sector.

[Questions from the floor]

[James Murray, Editor, BusinessGreen]

Precisely how unhelpful was the intervention from “The Peoples’ Minister” John Hayes ? Is this press blustering, or really damaging ?

[Nick Molho, World Wildlife Fund (WWF)]

It was unhelpful in two ways. First this kind of dispute will delay investment coming to the UK. And secondly, from the consumer’s perspective, their perception, that arguing about the costs of investment indicate that since the costs will be high, bills will go up.

[Ben Sykes, Director, UK Markets, DONG Energy]

Is lack of clarity helpful ? Probably not. I don’t like having to explain to investors on Wednesday mornings that, despite this, the UK has a stable policy environment, when competing for investment with other north western European countries.

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

From the investment committee point of view, for years, energy has been relatively boring, predictable. They haven’t seen it on the front page, they haven’t really been bothered. There has been a cross-party consensus. Now they get, on a weekly basis, very serious people raising issues, “You’ve seen the papers ? Why on Earth should we continue to support this ?” It raises the potential risk of policy change. And banks don’t like this. And this is also critical – it almost doesn’t matter what the policy message is – everybody just has to have the *same* one. We cannot have a situation where a subsidy was granted that is now no longer affordable. Projects are competing for capital – they need a consistent set of messages.

[Ben Sykes, Director, UK Markets, DONG Energy]

It is unhelpful for achieving long-term energy security. It’s lots of froth, but it is a problem for the UK. If we can’t settle down on an energy policy, we’re all in trouble. Although, in 24 hours it may have gone away.

[Simon Skillings, Senior Associate, E3G]

This might get some public discussion on energy. Some of these debates might be awkward, but if we don’t have them, we could have the situation in a few years where it is known that half the Cabinet think one thing and the other half of the Cabinet think another, which would be unhelpful. If this [Ministerial difference of policy opinion] does trigger a detailed debate, then it may be a good thing.

[Jessica Lennard, Edelman]

Are we going back to the “Pool” ? Will the Government become the buyer of last resort ? What are the Treasury guarantees ? What can we do about independent generators ? One thing is the design of the markets as much as anything. Can you as an independent enter the market ? There are now less opportunties for PPAs (Power Purchase Agreements). It’s unattractive and increasingly unbankable. The changes in the accounting regulations mean that you need to treat PPAs differently.

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

We have been working with large users of power and leading generators who are seeking to come to their own arrangements. We have to think about how to use the existing mechanisms and own corporate policies. We want to have a long term helper for large users. The bulk of people we lend to are independent. They need PPAs to unlock funding – and they are increasingly not able to get that.

[Simon Skillings, Senior Associate, E3G]

The issue is the power of the narrative about competition in the wholesale markets. It’s easier to be big than small – it is a driver for consolidation. It’s hard to promote independent generats without unpicking that narrative – for example, reference David Cameron’s remarks.

[Mike Rolls, Siemens]

We’re asking for a 2030 target because of the issues of the supply chain. The time horizon for the supply chain is longer – investors need to see a pipeline [emerging future demand based on policy steer] in order to sustain UK jobs in UK companies in the UK. We’ve seen the benefits of a consistent message on a commitment to nuclear power.

[Nick Molho, World Wildlife Fund (WWF)]

Should we have 2030 targets to replace 2020 one ? Yes, and work is being done in the EU on that. WWF is coming out with a report that the UK should sign up to a 2030 EU renewable energy target – it is entirely consistent with decarbonisation of the energy system. The UK could become an exporter of energy, as outlined in the Offshore Valuation Report, and could also export renewable energy technology.

[James Murray, Editor, BusinessGreen]

…There is the counter-argument that a target doesn’t provide the best price options…

[Nick Molho, World Wildlife Fund (WWF)]

The policy approach of taking a technology-neutral carbon price, from the investors point of view, is that this is not a long-term stable signal, and also, the carbon price will have to be set pragmatically [in a political process in a politically acceptable fashion].

[Ben Sykes, Director, UK Markets, DONG Energy]

A 2030 horizon really matters to us. We need a supply chain to have legs if it’s going to drive down costs by 2020. We can only deliver ever-lower costs in offshore wind if the industry sees the potential. We won’t get to 2020 and then all sit down – no. We need a signal into the supply chain for 2030.

[Alan Simpson MP, “architect of the Feed-in Tariff”]

In Germany the policy discussions are much clearer about the paradigm shift to a cleaner energy system. If DECC didn’t need to find a way to subsidise nuclear power, would we need to have this Energy Bill at all ?

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

We would need something, even if not trying to support new gas and new nuclear. All the issues are about financing, we haven’t discussed *markets*. Despite the complexity of the Renewables Obligation (RO), it *was* bringing forward renewable energy – the RO would have worked as least as well [as introducing the EMR]. The arguments were that the RO was unfit for purpose – but what’s a levy control framework more than an RO ? We could have had more investment velocity if the EMR had *not* been happening. Introducing that level of uncertainty – a hiatus – has been unhelpful in the supply chain. We should have been investing in the UK.

[James Murray, Editor, BusinessGreen]

It’s important to note that even with all the uncertainty, we are seeing the most investment in energy in the last 10 years.

[Simon Skillings, Senior Associate, E3G]

The Germany comparison is very interesting. The transformation in the energy sector, the Energiewende, is operating at a very deep cultural level. Is the UK Energy Bill re-enshrining history rather than creating a new future ? It’s intelligent to come back to focus on the demand side – a self-reinforcing process.

[Tim Probert, New Power]

The levy control framework, and its inevitable cap on capacity. Is it competitive or anti-competitive ? Will developers bid higher or lower into the market ?

[Simon Skillings, Senior Associate, E3G]

Dieter Helm makes some good and some bad points. A good point is that we are effectively entering a world of centrally managed contracts – the biggest impact is in the supply chain and the new market arrangements need to [cater for that].

[Ben Sykes, Director, UK Markets, DONG Energy]

Will it be possible to game the levy control framework ? How it interacts with the supply chain is critical.

[Mayer Hillman, Policy Studies Institute, reaching the age of 81 yesterday]

I fear my worst expectations have been confirmed. All the discussion i based on the assumption that the Government has a responsibility to meet consumer demand, minimising risks, but this is fundamentally wrong. Policy has to determine demand to capacity of the planet to absorb any further greenhouse gas emissions. If we look at that we need to face reality. We are now living on a planet where climate change is irreversible. If you don’t believe me, answer how we can reverse the melting of the ice cap ? How is it we can go on talking about demanding more renewable energy without considering the extent to which it is essential – the environmental constraints are often lost in the debate.

[Nick Molho, World Wildlife Fund (WWF)]

Our regular report shows that we consuming at a rate of 1.5 planets. We can’t just focus on the supply side – for example to meet the doubling electricity demand forecast by DECC. How can we put efficiency at the centre of policy ? The key needs are energy efficiency, generation, demand side management.

[Rachel Carey, Green Alliance]

The cap on spend for renewable energy and other low carbon energy in the levy control framework – is the capacity market to be included [the proposal to make payments to generators to keep their plants on standby to back up renewable energy] ? Will payments be minimised ?

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

We are certainly looking at the capacity mechanism influence. We need a capacity indicator [in the levy control framework] to bring forward investment. Decisions on thermal plant [including coal] are difficult to make at the moment. I refer to a recent Reuters article that a £90 per MWh strike price [on the Contracts for Difference (CfDs)] will take forward a price of £60 into the market. To bring on 20 GW of nuclear and Carbon Capture and Storage with coal, this price is double the levy control framework allocation for 2030. There are no numbers beyond 2015 – it runs out pretty quickly.

[James Murray, Editor, BusinessGreen]

Are you saying that if the Treasury made the levy control framework cap low enough, it would make the whole EMR exercise completely redundant ?

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

Yes.

[Questionner]

In the Energy Bill, the Secretary of State is seeking 50 new powers. Do we need to accept the role for the market is so minor that we should go for national control of energy ? Should we stop the pretence that a competitive market can be induced ?

[Simon Skillings, Senior Associate, E3G]

To me, there seems to be no narrative that speaks to prices, competition, and consumer benefits. We’re trying not to say it [the call for renationalisation of the energy sector]. We don’t believe new narrative should be national planning for energy. We need a new focus for innovation and customer benefits – shifting the narrative away from the wholesale world to the retail options [at point of sale] world.

[Ben Sykes, Director, UK Markets, DONG Energy]

Do I trust the Government or the markets to create a low carbon energy system ? We might need to live with the ambiguity – somewhere in between.

[Nick Molho, World Wildlife Fund (WWF)]

The Government needs to be speaking with one voice. In the past we have seen various parties calling for the 2030 target.

[Andrew Buglass, Head of Energy, Royal Bank of Scotland/Low Carbon Finance Group]

It’s looking like choppy waters.

[James Murray, Editor, BusinessGreen]

We have to recognise that it’s a relatively small number of Conservative MPs whipping up this media storm.

[End of the first session]

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